Has the growth of microcredit in developing countries contributed to the reduction of poverty? From my observation, the answer to this question must be both yes, and no.

Yes, because poor entrepreneurs now have the opportunity to access seed capital, which would not be normally available to them from commercial banks, due to their lack of collateral, or record of accomplishment in business.

Yes, because poor farmers now have access to capital to help them ride the seasonality of their incomes, instead of pre-selling their crops or services to intermediaries at bargain basement prices.

Yes, because microcredit lenders usually advance loans to groups or individuals in groups, where peer pressure to repay serves as an excellent form of collateral. This makes for better group bonding and resilience, when they collaborate to compete. This cohesiveness has a knock-on benefit in terms of group advocacy, as a voice to pressure local officials for access to opportunities, services, and fair treatment.

No, because in an urban situation, microcredit lenders do not research the market on how much of a particular service could be absorbed locally. In a poor developing country, there is a limit to the local demand for rickshaw services, grocery shops, or tailoring services, and the like. The limited range of small business opportunities have a saturation point beyond which diminishing returns set in. With limited demand for their services, the inexperienced entrepreneur is unable to service the loan, contributing to the deterioration of their financial situation.

No, because many microcredit lenders pride themselves on obtaining a 100% repayment record. This is an illusion. Either they are lending to the wrong group of people who already have the resources and skills to lift themselves out of poverty, or alternatively the borrrowers are obtaining credit from elsewhere to repay them. I would also examine the process for identifing non-performing loans, as supervisors on the ground have been known to fiercely resist re-classification, being an admission of failure.

No, because gaps in the loan monitoring process mean that funds originally intended for direct income generation purposes leak into other uses, like paying for dowry, house repairs, or to pay off other loans from elsewhere. The leakage to non-income generation purposes effectively turns the microcredit scheme into a poverty trap, as these borrowers lack the resources or cash flow to repay.

So has microcredit made a positive impact on poverty reduction? The answer depends on whom you ask.

James Meyer